1101IBA Management Concepts

T2 2021 Final Exam Case Study B.

Case Study “Relying on quality to bring control”

In 2009, Fortune magazine praised Japanese conglomerate Toyota as the world’s third most admired
company. By 2011 it had slipped to thirty-third.
What had caused this considerable decline in the reputation of the world’s favourite automobile
manufacturer? One contributing factor were accidents involving their vehicles, which had been reported
by the media. In one notable case, a Californian family were all killed in 2009 when the accelerator in the
Lexus they had on loan from a dealership stuck. The engine propelled them into a 200 kilometre/hour
crash.
A number of other crashes contradicted the company’s marketing slogan of ‘safety first’. In 2013 Toyota
settled a class action for US$1.6 billion. In 2014 US authorities imposed a US$1.2 billion penalty, with the
Federal Bureau of Investigation judgement that ‘Toyota put sales over safety, and profits over principle’.
The issues were not about quality control but from trying to hide the problems. Denials of responsibility
were followed by apologies, but repeated promises to remedy the lack of quality control were never
implemented. A culture of a hierarchical organisation can encourage a safety orientation but can also
inhibit employees’ from speaking up about control failures if they fear retribution for challenging their
bosses.
The problems so evident in Toyota are not limited to just this one carmaker. In 2015, General Motors was
fined US$900 million for failing to act on ignition problems that directly claimed 124 lives. In 2014,
Hyundai-Kia was fined US$300 million for misstating fuel-economy figures. In 2015, Volkswagen CEO
Martin Winterkorn resigned due to the giant scandal that erupted when it became public news that the
respected German firm had deliberately falsified engine emissions data by ‘fixing’ computer software in
reporting procedures to deceive US regulators, resulting in a drop of €26 billion to the company’s value.
Part of the problem may be that car manufacturers are faced with a competitive market of continually
rising standards for economy and emissions and are struggling to introduce more efficient engine
technology at acceptable costs and thus prices to demanding customers not yet ready to embrace a trade-
off with reduced performance in their cars.
All of this prompts the question: can good management implement controls that militate against bad
management behaviour to deliver on the needed promises?
Some of the controls that need to be implemented are internal controls. The culture of profit over principle
for which Toyota was criticised in 2014 is obviously damaging. Honesty and integrity are corporate values
in need of re-emphasis. VW’s infamous cheating by tampering with its own software has alerted everyone
to the insidious corruption of which even great companies are capable. Tighter procedural controls in
monitoring and reporting internally are obviously required.
Other controls relate to external regulations. The Environmental Protection Agency in the United States is
contemplating imposing a vehicle emissions standard similar to the European standard of 95 grams of CO2
kilometre (due to be phased in from 2020). Unsurprisingly, the industry is resisting such initiatives.
The hope has been that improvements in diesel engines and their generation of more power per litre of
fuel burned (but with more emissions than petrol engines) would appeal even to markets where the use of
frugal diesel engines is not yet common, such as in the United States. Diesel engines power about half the
vehicles sold in Europe but less than 1 per cent of US cars. Questions relating to globalisation and
sustainability loom large.
However, the concerns of environmentalists about diesel engines’ higher output of nitrous oxides and
other particulates are potentially bringing forward an industry shift from internal combustion technology
and diesel engines to electric vehicles, as battery technology improves and governments in countries such
as India and China move to limit pollution caused by carbon emissions.
In a world market worth US$2 trillion, it is expected that cashed-up non-car manufacturers like Apple and
Google will be scanning for opportunities to design, build and market electric cars. Even the difference
between the 40 per cent gross profit margin that Apple currently makes and the 20 per cent that BMW
makes might not be large enough to inhibit Apple’s market entry.

Source: In Textbook Ch 11 P292,

Schermerhorn, John R., Paul Davidson, Aharon Factor, David Poole, Peter Woods, Alan Simon, Ellen
McBar. Management: Asia–Pacific Edition, 6th Edition. John Wiley & Sons Australia, 08/2016.
VitalBook file, Pg 292.
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SWOT for Electric Cars